(De)valuing Social Networks

Interesting piece in TechCrunch re valuation of Social Networks, the really interesting bit is this table:



Now we have had a look at these valuations before, (see here and here for example) and our view is that the tiny % investments in Facebook and Linked In don't really show value, whereas outright takeouts like Last.fm and Bebo do. Thus the column from Bebo's valuation are in our view more indicative of the real values - especially given that there is increasingly a view that the early assumption of Ad revenues are overblown

There are clearly conditions to the valuation, and this was a good comment from Rich Swier:

....but from a pure valuation perspective, you are missing some key elements like

1. Dead Profiles - The biggest “dirty little secret” noone talks about is how many of these sites have dead profiles, where people never login again. If you look at Alexa (etc) you can predict how active the site really is. I think most of these sites have a serious retention problem.. especially Facebook (once kids graduate and become adults)

2. User “willingness” to Pay - this to me is the biggest factor you overlook to some degree. Its great to have millions of users, but if they are not willing to pay for premium features, then it will be hard to monetize. Even the biggest networks make very little money on ads… (because users are there to socialize not click on ads (e.g. shop). To me this is the key to a valuation. If you can’t make money? What’s the point?

3. And finally, the other factor to Valuation is “who will buy it?”… I don’t think any of these companies can or want to go public.. so who is the buyer? if there is no buyer, then the valuation is meaningless…. I think sites with critical brand recognition like Linked In in the pro-market, will have a longer list of buyers…

All very true, but given that most of these networks are chasing similar (yoof) demographics we can probably assume 1 and 2 are more similar than different (Linked in being an exception) Point 3 is always key - there is a limited set of buyers for these services.